Clayton Utz finds that while Australian firms are getting warn to restructurings, new legislation is not enough to create a true business rescue culture.
While there has been an increase in Australian companies engaging with turnaround specialists, corporate leaders need to be more open to restructuring, Clayton Utz urges as it released its latest restructuring market report.
In the From Red to Black report which looks at the state of the Australian restructuring market in FY16 and predictions for FY17, Clayton Utz notes that there has been an increase in companies engaging restructuring specialists in the last 12 months.
Clayton Utz partner Karen O'Flynn says, however, that many boards and management teams in Australia were still reluctant to embrace the benefits of early intervention when a company was in trouble.
“An example of a board that successfully rose to this challenge was Atlas Iron. The Atlas board engaged restructuring specialists who together were able to draw on their decades of experience to implement a successful turnaround plan that ultimately delivered a better outcome for both creditors and shareholders than had the board sat back and let the company be placed into administration or fallen into liquidation,” says the firm’s national Restructuring and Insolvency practice head.
The partner notes while the Federal government's long-awaited proposal to introduce a “safe harbour” defence for directors as part of its National Innovation and Science Agenda may go some way to encouraging boards to engage advisory teams early on to devise and implement turnaround plans, legislative reform alone was not the answer to create a true business rescue culture in Australia.
“While we welcome the Federal government's promotion of a ‘safe harbour’ defence for directors to strike a better balance between encouraging entrepreneurship and protecting creditors, legislative reform merely provides a process for change. We also need to change cultural attitudes to restructuring so boards see it not as a sign of failure but as a valuable tool in successfully turning around the company when it falls into distress,” says O’Flynn.
Cameron Belyea, a Clayton Utz partner who specialises in contested debt and capital restructuring, says current market conditions point to more corporate restructurings over the next 12 months.
“There are a number of factors at play, including a looming debt wall for FY17, bubbles within segments of the property and construction markets, and higher banking capital to cover risk. Triggers such as industrial action, litigation, market disruption, debt overburdens, or just bad management can all tip a company into distress territory,” says the co-author of the report.
“A good board will have systems in place that pick up the early warning signals and have a turnaround plan ready that responds to the distressed event triggers. As we saw with Atlas Iron, the future bode well for boards willing to engage advisory teams early to devise and implement turnaround plans,” he adds.
From Red to Black also reveals that while the secondary debt market is now firmly placed as a viable enforcement option in distressed situations, conditions continue to hold back market growth.
“While there has been limited activity in the public space, recent high-profile matters including Bis Industries and Arrium have resulted in renewed interest from investors. Private sector trades continue to advance given traditional lenders' increased lending hurdles, the continued slowdown in the mining and mining services sectors, and traditional lenders' preference to avoid the costs, risks and potential reputational damage associated with formal enforcement action,” says Clayton Utz partner and report co-author Nick Poole.
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In the From Red to Black report which looks at the state of the Australian restructuring market in FY16 and predictions for FY17, Clayton Utz notes that there has been an increase in companies engaging restructuring specialists in the last 12 months.
Clayton Utz partner Karen O'Flynn says, however, that many boards and management teams in Australia were still reluctant to embrace the benefits of early intervention when a company was in trouble.
“An example of a board that successfully rose to this challenge was Atlas Iron. The Atlas board engaged restructuring specialists who together were able to draw on their decades of experience to implement a successful turnaround plan that ultimately delivered a better outcome for both creditors and shareholders than had the board sat back and let the company be placed into administration or fallen into liquidation,” says the firm’s national Restructuring and Insolvency practice head.
The partner notes while the Federal government's long-awaited proposal to introduce a “safe harbour” defence for directors as part of its National Innovation and Science Agenda may go some way to encouraging boards to engage advisory teams early on to devise and implement turnaround plans, legislative reform alone was not the answer to create a true business rescue culture in Australia.
“While we welcome the Federal government's promotion of a ‘safe harbour’ defence for directors to strike a better balance between encouraging entrepreneurship and protecting creditors, legislative reform merely provides a process for change. We also need to change cultural attitudes to restructuring so boards see it not as a sign of failure but as a valuable tool in successfully turning around the company when it falls into distress,” says O’Flynn.
Cameron Belyea, a Clayton Utz partner who specialises in contested debt and capital restructuring, says current market conditions point to more corporate restructurings over the next 12 months.
“There are a number of factors at play, including a looming debt wall for FY17, bubbles within segments of the property and construction markets, and higher banking capital to cover risk. Triggers such as industrial action, litigation, market disruption, debt overburdens, or just bad management can all tip a company into distress territory,” says the co-author of the report.
“A good board will have systems in place that pick up the early warning signals and have a turnaround plan ready that responds to the distressed event triggers. As we saw with Atlas Iron, the future bode well for boards willing to engage advisory teams early to devise and implement turnaround plans,” he adds.
From Red to Black also reveals that while the secondary debt market is now firmly placed as a viable enforcement option in distressed situations, conditions continue to hold back market growth.
“While there has been limited activity in the public space, recent high-profile matters including Bis Industries and Arrium have resulted in renewed interest from investors. Private sector trades continue to advance given traditional lenders' increased lending hurdles, the continued slowdown in the mining and mining services sectors, and traditional lenders' preference to avoid the costs, risks and potential reputational damage associated with formal enforcement action,” says Clayton Utz partner and report co-author Nick Poole.
Related stories:
Weekly Deals Roundup: M&A and capital raisings dominate the week
Key legal concerns for SMEs and online businesses identified
